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Oaktree Howard Marks: Masters in Business (Audio) · Masters in Business

• 0:03
  Speaker 1: This is Master's in Business with Barry Ridholets on Bloomberg Radio.
• 0:08
  Speaker 1: This week on Master's in Business on Bloomberg Radio, I
• 0:11
  Speaker 1: have a very special guest. Yes, I know you're all
• 0:15
  Speaker 1: gonna make fun of me once again, I am saying
• 0:17
  Speaker 1: I have a very special guest. But when you hear
• 0:20
  Speaker 1: my conversation with my guest, you will agree this is
• 0:24
  Speaker 1: a very special guest. Howard Mark's chairman, co founder oak
• 0:29
  Speaker 1: Tree Capital. His firm has put up an absolutely astonishing
• 0:35
  Speaker 1: track record of long term performance in the debt market.
• 0:40
  Speaker 1: He's been running the firm for twenty two years. They've
• 0:43
  Speaker 1: put up phenomenal numbers. Nobody is really even close to them. Uh.
• 0:48
  Speaker 1: And and when you consider that it's in debt and
• 0:50
  Speaker 1: not equity, the numbers are even more astonishing. I I
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  Speaker 1: found Howard to be extremely thoughtful, intelligent, forthcoming individual. Not
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  Speaker 1: a lot of people who are in his circumstances UH
• 1:06
  Speaker 1: tend to be as just transparent and open. And you know,
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  Speaker 1: he just lays his cards down on the table. Uh.
• 1:14
  Speaker 1: I think you'll find his discussion on second level thinking
• 1:18
  Speaker 1: to be very worthwhile, as well as his explanation for
• 1:22
  Speaker 1: how and why investors become successful. You know, there are
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  Speaker 1: a lot of people who are smart guys, who are
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  Speaker 1: hard working, who who apply their their field in the
• 1:36
  Speaker 1: um industry of of investing in finance, and they end
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  Speaker 1: up putting out numbers that are you know, fair at best.
• 1:43
  Speaker 1: And Howard explains what you need to do if you
• 1:47
  Speaker 1: want to outperform. I especially am fond of his discussion
• 1:53
  Speaker 1: on predictions and the folly of forecasts let's a little
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  Speaker 1: bit of confirmation bias on my time, my my part,
• 2:01
  Speaker 1: as well as his discussion on on risk and risk management.
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  Speaker 1: I found that absolutely fascinating and I think you will
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  Speaker 1: as well. So, without any further ado, here is my
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  Speaker 1: conversation with Howard Marks of oak Tree Capital. This is
• 2:18
  Speaker 1: Masters in Business with Barry Ridholts on Bloomberg Radio. My
• 2:22
  Speaker 1: special guest today is truly a special guest. His name
• 2:26
  Speaker 1: is Howard Marks and he runs oak Tree Capital. Let
• 2:30
  Speaker 1: me give a short version of Howard's curriculum vita, which
• 2:34
  Speaker 1: is quite lengthy. Um graduated from Wharton at the University
• 2:38
  Speaker 1: of Pennsylvania cum laude in nine seven, a major in
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  Speaker 1: finance and a minor in Japanese studies. Got his MBA
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  Speaker 1: from the University of Chicago Booth School of Business, worked
• 2:50
  Speaker 1: as an equity research analyst at City Corps for the
• 2:53
  Speaker 1: next decade before he became director of research. Ultimately became
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  Speaker 1: vice president and senior portfolio manager for convertible and high
• 3:02
  Speaker 1: yield securities. Left to lead the distressed asset group at
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  Speaker 1: Trust Company of the West. Did you lead that group
• 3:10
  Speaker 1: or set it up? We'll we'll get into that. We'll
• 3:12
  Speaker 1: get into a little more details about that. And then
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  Speaker 1: he left Trust Company of the West to set up
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  Speaker 1: oak Tree Capital, which runs a high yeld bond fund,
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  Speaker 1: distressed debt, private equity, and other strategies, and has put
• 3:26
  Speaker 1: up some astonishing performance numbers. The seventeen distressed debt funds
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  Speaker 1: that oak Tree has ranked up annual gains of after
• 3:36
  Speaker 1: fees for the past twenty two years, far outpacing its peers.
• 3:41
  Speaker 1: Howard Marks, Welcome to Bloomberg. Thank you, Barry. So let's
• 3:45
  Speaker 1: get into a little bit about your background. Obviously Wharton
• 3:49
  Speaker 1: and then a MBA suggests you had been thinking about finance.
• 3:54
  Speaker 1: Were there ever any plans to do anything besides uh,
• 3:57
  Speaker 1: go into asset management. Well, I wasn't one of these
• 4:01
  Speaker 1: kids who was reading prospectuses at nine you know. Uh,
• 4:05
  Speaker 1: first I wanted to be a high school history professor,
• 4:08
  Speaker 1: that I wanted to be an architect. I had lots
• 4:09
  Speaker 1: of interest. And then then when I got serious, I
• 4:12
  Speaker 1: thought I'd be an accountant because that's what my dad was,
• 4:15
  Speaker 1: and I I really enjoyed accounting. But when when I
• 4:18
  Speaker 1: got to Warden, I switched from accounting to finance in
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  Speaker 1: terms of my interest. When I got out of Chicago,
• 4:24
  Speaker 1: I still didn't know what I wanted to do. I
• 4:26
  Speaker 1: knew it would be in finance, but I applied for
• 4:28
  Speaker 1: six different jobs in six different fields of finance. Oh
• 4:32
  Speaker 1: that's quite interesting. What other fields were you looking at? Accounting,
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  Speaker 1: corporate finance, investment, banking, consulting, um, great variety. Well, well,
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  Speaker 1: you seem to have found your call. And I got
• 4:44
  Speaker 1: lucky to say, And by the way, that's something that
• 4:46
  Speaker 1: just about every guest I've had has said, never hurts
• 4:50
  Speaker 1: to get lucky, and U being smart doesn't hurt either.
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  Speaker 1: A good combination between the two of them. So you
• 4:56
  Speaker 1: began your career. I found this fascinating. You began your
• 4:59
  Speaker 1: career as an equity analyst, and yet when you moved
• 5:02
  Speaker 1: to the Trust Company of the West, you started covering
• 5:05
  Speaker 1: fixed income. How did that transition take place? Well, it's
• 5:09
  Speaker 1: not that interesting a story, but but but you know
• 5:13
  Speaker 1: at a bank, you progress, uh hierarchically. So I moved
• 5:18
  Speaker 1: from being a junior anals so senior analyst, to a
• 5:20
  Speaker 1: unit head to director of research. As you described. The
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  Speaker 1: bank didn't do well in that period because we were
• 5:26
  Speaker 1: nifty fifty investors, the fifty biggest, fastest growing, best companies
• 5:31
  Speaker 1: in America. UM. And if you bought them in sixty
• 5:34
  Speaker 1: eight and you sold him in seventy three, uh, in
• 5:37
  Speaker 1: the best companies in America lost any money. Uh. And
• 5:41
  Speaker 1: so that that didn't work out well. I was part
• 5:43
  Speaker 1: of that UM regime and a new guy came in
• 5:48
  Speaker 1: to be chief investment officer and and he wanted his
• 5:52
  Speaker 1: own director of research. And he said, I'd like you
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  Speaker 1: to start a convertible body fund just like just like that,
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  Speaker 1: And so I did. It was August the first seventy eight.
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  Speaker 1: And then I got a call later that month from
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  Speaker 1: from my boss and he said, you know, the there's
• 6:06
  Speaker 1: some guy in California named Milken or something, and he
• 6:09
  Speaker 1: deals in high yield bonds. Can you figure out what
• 6:12
  Speaker 1: that means? Because a client has just asked for a
• 6:14
  Speaker 1: hiel bond portfolio. You know, that was part of my luck.
• 6:19
  Speaker 1: That was the beginning of the hyl bond industry. I
• 6:21
  Speaker 1: was thirty seven years ago. And uh, you know, almost
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  Speaker 1: everything that's been interesting in finance in the last thirty
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  Speaker 1: seven years has gone through, uh, the hyal bond market.
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  Speaker 1: So it's front row seat on history. And you know,
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  Speaker 1: part of the luck is to get there early, and
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  Speaker 1: I did. And I also get the sense that you
• 6:39
  Speaker 1: very much enjoy having that front seat on history, in
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  Speaker 1: history and being able to to be more than a spectator,
• 6:46
  Speaker 1: but an active partisan, right, an active participant, and and
• 6:50
  Speaker 1: and somebody who tries to figure out what's going on,
• 6:53
  Speaker 1: not just cope with what's going on, but actually understand
• 6:56
  Speaker 1: and fundamentally and and as you know, communicate about it.
• 6:59
  Speaker 1: I believe you have described that as second degree thinking,
• 7:03
  Speaker 1: second level, second level, second level thinking. Yes, that's right. Uh.
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  Speaker 1: You know, the real success in investing goes to people
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  Speaker 1: who who achieve a superior understanding of the things that
• 7:18
  Speaker 1: are going on, why they're going on, and what they mean.
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  Speaker 1: In other words, not just understand what the crowd knows,
• 7:26
  Speaker 1: but a whole level beyond that. Well, if you if
• 7:30
  Speaker 1: you think the same as everybody else, you'll behave the
• 7:32
  Speaker 1: same And if you behave the same as everybody else,
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  Speaker 1: you can't expect to outperform. You'll get you'll get average results.
• 7:40
  Speaker 1: But in investing um success consists of having above average results.
• 7:46
  Speaker 1: So you have to get away from the crowd and
• 7:48
  Speaker 1: you have to achieve a higher level of thinking. You know,
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  Speaker 1: for example, very simple uh people say it's a great company,
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  Speaker 1: you should buy the stock. Second level thinker says, it's
• 7:59
  Speaker 1: a great company, but it's not as great as everybody thinks,
• 8:01
  Speaker 1: you should sell the stock. So it's kind of uh,
• 8:05
  Speaker 1: it's kind of reflexive or counterintuitive. Doug Doug cast We
• 8:10
  Speaker 1: were discussing a mutual friend calls that variant perception, looking
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  Speaker 1: at things a little differently than everybody else does to
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  Speaker 1: find the opportunity. That's right. So, so speaking of opportunity,
• 8:21
  Speaker 1: you end up at Trust Company of the West and
• 8:24
  Speaker 1: you created the high EELD bond fund. There a convertible
• 8:27
  Speaker 1: securities funds and is this was this the world's first
• 8:31
  Speaker 1: distress bond fund. I think it was the first distressed
• 8:35
  Speaker 1: debt fund from a mainstream financial institution prior to that
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  Speaker 1: at just as our high yeld bond fund that city
• 8:42
  Speaker 1: and seventy eight was the first one from a financial institution.
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  Speaker 1: No bank had ever done it before, or trust company
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  Speaker 1: and UH and the same was true in the distress
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  Speaker 1: dead field. You know, you had your your, your couple
• 8:56
  Speaker 1: of guys at a desk in Grantwitch or on place
• 9:00
  Speaker 1: trading for their own accounts, or a few for a few,
• 9:03
  Speaker 1: you know, for a small high net worth hedge funds,
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  Speaker 1: but UH, nobody had ever done it on the institutional scale.
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  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
• 9:12
  Speaker 1: special guest today is Howard Marks. He is the founder
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  Speaker 1: and chairman of oak Tree Capital. And we were discussing previously.
• 9:20
  Speaker 1: You had set up what turned out to be the
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  Speaker 1: largest distressed debt funds right in the midst of the
• 9:27
  Speaker 1: financial collapse in oh seven o eight. What was that like?
• 9:30
  Speaker 1: What sort of pushback did you get from investors? Well,
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  Speaker 1: we started to raise UH capital on the first day
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  Speaker 1: of oh seven and things have been going very well
• 9:41
  Speaker 1: in the world. UM. And what happens, of course, is
• 9:46
  Speaker 1: that when things go well, UH standards decline. People require
• 9:50
  Speaker 1: less credit worthiness, they do riskier deals, they take more risk,
• 9:53
  Speaker 1: because what the hell they figure, the more risk you take,
• 9:56
  Speaker 1: the more money you make. Uh. We were alarmed at
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  Speaker 1: that friend, and so we went out to raise a fund.
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  Speaker 1: On the first day of O seven, we said we'd
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  Speaker 1: like to raise three billion. Now we had started off
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  Speaker 1: eight UM with a ninety six million dollar fund. We
• 10:11
  Speaker 1: had grown past a billion dollar mark around and here
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  Speaker 1: we are in O seven. We said we liked that
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  Speaker 1: three billion UM and uh. Within a month people had
• 10:21
  Speaker 1: offered us eight and we said, we can't take eight.
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  Speaker 1: There's nothing to do with eight. But we'll take three
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  Speaker 1: and a half and we'll close that fund and we'll
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  Speaker 1: start investing the three and a half billion. And uh.
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  Speaker 1: But we asked people to give us the remainder of
• 10:34
  Speaker 1: their commitments for a standby fund, that the money that
• 10:38
  Speaker 1: we could have in reserve, because we thought there was
• 10:40
  Speaker 1: an opportunity coming and if it came, we'd like that
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  Speaker 1: more money. I think I think that was a little
• 10:44
  Speaker 1: bit of an understatement that opportunity came along. It certainly
• 10:48
  Speaker 1: did later on it did. So anyway, we had the
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  Speaker 1: first closing in March of O seven and the last
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  Speaker 1: closing in March of OH eight, and by the time
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  Speaker 1: we finished raising money was ten point nine billion, as
• 11:00
  Speaker 1: you know, and now is our fund seven B we
• 11:02
  Speaker 1: called it, and we we told people that we wouldn't
• 11:07
  Speaker 1: raise them invest the money until there was something good
• 11:10
  Speaker 1: to do with it, and we wouldn't charge any fees
• 11:12
  Speaker 1: until we invested the money. Um So we waited from
• 11:17
  Speaker 1: the March oh seven until June of eight to start investing,
• 11:20
  Speaker 1: and in June of eight we started to invest gradually
• 11:24
  Speaker 1: and the fund was called the Dailyman went under September
• 11:29
  Speaker 1: fifteen of eight, and then we really got busy and
• 11:34
  Speaker 1: it was se called on December. How long did it
• 11:38
  Speaker 1: take to get fully invested at that point, well, the
• 11:40
  Speaker 1: last we never invested the last money. It's an interesting story, yes,
• 11:45
  Speaker 1: because well we thought that in a real meltdown that
• 11:50
  Speaker 1: cash would be king. We would be involved in bankruptcy restructurings,
• 11:55
  Speaker 1: and in order to really capitalize on them. You know,
• 11:59
  Speaker 1: in a world where nobody has any money, there's a
• 12:01
  Speaker 1: great premium on having some cash, and we thought that
• 12:04
  Speaker 1: having some cash in reserve could give us real power
• 12:08
  Speaker 1: at the bargaining table. So we we said we're going
• 12:10
  Speaker 1: to leave the last ten percent of the fund, which
• 12:13
  Speaker 1: was a billion one uninvested, so we never did invest that,
• 12:16
  Speaker 1: and those restructurings, for the most part, never materialized. The
• 12:20
  Speaker 1: world turned around much faster than we would have thought.
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  Speaker 1: That's quite fascinating. And I mentioned in in the introduction
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  Speaker 1: that you have about seventeen distress funds, all told different series.
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  Speaker 1: I think that's right. And the performance numbers on those funds,
• 12:35
  Speaker 1: and we rarely tout performance. We don't like to get
• 12:39
  Speaker 1: into the details too much, but I have to mention
• 12:42
  Speaker 1: these numbers because they're just astonishing. After fees over the
• 12:46
  Speaker 1: past twenty two years, your funds of average annually, that's
• 12:52
  Speaker 1: just extraordinary. Well, my colleagues are exceptional. Um, you're just
• 12:59
  Speaker 1: a buy stand. They're just an innocent boy. Well, the
• 13:02
  Speaker 1: day to day the person who really uh you know,
• 13:05
  Speaker 1: I I help set the scene and make them big
• 13:09
  Speaker 1: tactical decisions. But the person who actually runs that fund
• 13:12
  Speaker 1: from day to day is Bruce carsh He's been my
• 13:15
  Speaker 1: partner since right as well, right, and uh, and he's
• 13:21
  Speaker 1: just he's just an exceptional strategist, you know, competitor, uh,
• 13:27
  Speaker 1: you know, chess player, what what have you? And he
• 13:30
  Speaker 1: just figures out how to gain these things. We we've
• 13:33
  Speaker 1: always had a great UH stable of financial analysts that
• 13:39
  Speaker 1: work with us. And so you know, the key is
• 13:41
  Speaker 1: to do a better job than others of figuring out
• 13:44
  Speaker 1: what the what the company that rises from the ashes
• 13:49
  Speaker 1: of bankruptcy is going to be worth, and how to
• 13:52
  Speaker 1: get how to get a piece of that cheaply and
• 13:55
  Speaker 1: UH and they've been able to do that successfully over
• 13:58
  Speaker 1: the years. Now, I agree with you Barry the short
• 14:02
  Speaker 1: term that performance numbers, we shouldn't dwell on them too much.
• 14:04
  Speaker 1: And I love your reciting hours. But but I would
• 14:07
  Speaker 1: remiss if I didn't mention the fact that that is
• 14:09
  Speaker 1: an unlevered return. Now that's we don't borrow any money
• 14:13
  Speaker 1: to amp up the results. That's just the result of
• 14:15
  Speaker 1: our investments making it even even more extraordinary. So so
• 14:20
  Speaker 1: the secret to your success is a combination of an
• 14:23
  Speaker 1: outstanding team UH, excellent assessment of what's going on, figuring
• 14:28
  Speaker 1: out the valuation of what things are worth, and and
• 14:32
  Speaker 1: how do you avoid what's been Dick Thaler called the
• 14:36
  Speaker 1: failor called the winner's course, the bidding too much to
• 14:39
  Speaker 1: actually win, and finding yourself with something that you ultimately
• 14:43
  Speaker 1: paid too much for. I think that the secret to
• 14:47
  Speaker 1: solving all problems. Starts with awareness of that problem. So
• 14:51
  Speaker 1: if you understand that that that winning an auction is
• 14:57
  Speaker 1: not necessarily a a boon, uh, then you you can
• 15:02
  Speaker 1: develop discipline. Uh and UH you know UH. When we
• 15:07
  Speaker 1: started oak Tree, we wrote out the uh the investment philosophy.
• 15:11
  Speaker 1: There are six tenants to it. It's on the website
• 15:13
  Speaker 1: if anybody wants to look. We've never changed a word
• 15:16
  Speaker 1: in over twenty years. And the first tenant says that
• 15:19
  Speaker 1: the that they are the most important part of our
• 15:22
  Speaker 1: job is risk control. So I'm proud of the performance
• 15:26
  Speaker 1: numbers that you reported, but I'm prouder that I believe
• 15:30
  Speaker 1: they have been achieved with the risks under control. I
• 15:33
  Speaker 1: believe that the first job of the money manager is
• 15:35
  Speaker 1: not to make a lot of money, and it's not
• 15:37
  Speaker 1: to beat the market, and it's not to be in
• 15:39
  Speaker 1: the top quartile. The first job is to control risk.
• 15:43
  Speaker 1: And everybody at oak Tree believes that follows that and
• 15:47
  Speaker 1: I believe that we always have had an effective emphasis
• 15:53
  Speaker 1: on controlling the risk. So now, when you describe controlling risk,
• 15:58
  Speaker 1: I want to put a little mean on those bones.
• 16:01
  Speaker 1: Are you referring to potential returns relative to the risk
• 16:04
  Speaker 1: you're taking. Are you talking about loss of capital? What
• 16:08
  Speaker 1: exactly is risk to someone running other people's money? Well,
• 16:12
  Speaker 1: to me, you know, the the academics to find investment
• 16:15
  Speaker 1: risk as volatility. I do not agree. To me. The
• 16:20
  Speaker 1: risk that matters is the risk of of permanent loss. Now,
• 16:24
  Speaker 1: there are lots of kinds of risks, and I put
• 16:27
  Speaker 1: out a memo in which I think I described twenty
• 16:30
  Speaker 1: three or twenty four different kinds of risk. But the
• 16:32
  Speaker 1: one that really matters is the risk of permanent laws.
• 16:35
  Speaker 1: And we believe that we can mitigate that risk by
• 16:40
  Speaker 1: picking in the right industries where the values are lasting
• 16:44
  Speaker 1: rather than ephemeral, by buying debt which is at the
• 16:47
  Speaker 1: top in terms of priority rather than at the bottom,
• 16:51
  Speaker 1: by doing rigorous financial analysis. You know, really, uh, safety
• 16:57
  Speaker 1: comes from paying less than things are worth and building
• 17:00
  Speaker 1: in a margin of safety. Uh So, only if you
• 17:03
  Speaker 1: fully understand what things are worth can you buy for less.
• 17:07
  Speaker 1: Welcome to Masters in Business on Bloomberg Radio. My special
• 17:10
  Speaker 1: guest today is Howard Marks. He is the founder and
• 17:13
  Speaker 1: chairman of oak Tree Capital. And before the break we
• 17:17
  Speaker 1: had been talking about your chairman's memos, which I find
• 17:20
  Speaker 1: to be not only required reading, but absolutely fascinating. Um,
• 17:25
  Speaker 1: why did you start the chairman memos? Chairman's memos? What
• 17:29
  Speaker 1: was the thinking beyond that? I wish I knew. You know,
• 17:32
  Speaker 1: I started twenty five years ago. I certainly can't remember
• 17:35
  Speaker 1: back that long. No legislative history, you don't have any
• 17:40
  Speaker 1: notes or anything. It just started. Well, what I would
• 17:42
  Speaker 1: guess is that you know, I mean years ago, I
• 17:47
  Speaker 1: had twenty years in this industry or twenty two, and
• 17:50
  Speaker 1: I was starting to think to develop the philosophy. What
• 17:53
  Speaker 1: did I believe in? What did I stand for? And
• 17:55
  Speaker 1: what did I reject? Uh? And UH. Two events occurred
• 18:00
  Speaker 1: UH where I thought there was something to be learned
• 18:03
  Speaker 1: from the juxtaposition. So I wrote the first memo. H
• 18:09
  Speaker 1: I had. I had dinner with the chief investment officer
• 18:14
  Speaker 1: of a large pension fund, and he explained to me
• 18:16
  Speaker 1: that in his fourteen years on the job, his fund
• 18:19
  Speaker 1: had never been above the twenty seven percentile or below
• 18:22
  Speaker 1: the forty seventh percentile. It was solidly in the second
• 18:25
  Speaker 1: quartile of pension funds, and as a result, for the
• 18:29
  Speaker 1: fourteen years overall, he was in the fourth percentage. So,
• 18:32
  Speaker 1: in other words, by not having any huge blowout years
• 18:35
  Speaker 1: which often follows those huge top ten years. He managed
• 18:39
  Speaker 1: to just gradually rise to the top. He never had
• 18:41
  Speaker 1: a top ten year he was he was solidly just
• 18:44
  Speaker 1: just a bit above average. Uh, and in the peculiar
• 18:48
  Speaker 1: math of investing, that made him one of the best
• 18:51
  Speaker 1: in the world. And then I came back to New
• 18:54
  Speaker 1: York and I and I read about the president of
• 18:57
  Speaker 1: an investment management firm which was having a particularly bad
• 19:00
  Speaker 1: year that year, and he said, well, you know, he says, yes,
• 19:03
  Speaker 1: it's unfortunate, but the truth is, if you want to
• 19:05
  Speaker 1: be in the top five percent of money managers, you
• 19:07
  Speaker 1: have to be willing to be in the bottom five percent.
• 19:10
  Speaker 1: And I said to myself, I am absolutely unwilling to
• 19:12
  Speaker 1: be in the bottom five percent. I don't care if
• 19:14
  Speaker 1: I'm in the top five percent in any given years. Obviously,
• 19:17
  Speaker 1: my previous discussion had shown that it's not essential, uh,
• 19:21
  Speaker 1: but I sure didn't want to be in the bottom five.
• 19:23
  Speaker 1: So that was that was a good look at two
• 19:26
  Speaker 1: different ways to think, and it was clear to me
• 19:29
  Speaker 1: which one had the appeal. So consistency second quartile over
• 19:33
  Speaker 1: long periods of time put you in that top five
• 19:36
  Speaker 1: or better, and no blow ups and no blow ups.
• 19:39
  Speaker 1: So you start these in this is pre internet. Are
• 19:43
  Speaker 1: you faxing these? Are you? How are these going out?
• 19:47
  Speaker 1: I'm I'm writing them up and uh, you know, stuffing
• 19:51
  Speaker 1: envelopes and and and putting them out on paper and
• 19:55
  Speaker 1: and uh putting stamps on him and and and throwing
• 19:59
  Speaker 1: them down the drain. Now why do I say down that? Wait? Wait,
• 20:02
  Speaker 1: so every quarter the whole staff gets together periodically, so
• 20:06
  Speaker 1: it wasn't wasn't that regular in the beginning, but at
• 20:09
  Speaker 1: least once a year, I think, just once a year
• 20:11
  Speaker 1: in ninety and once a year in ninety one. And
• 20:14
  Speaker 1: out they go. And what's the response? Non zero crickets
• 20:18
  Speaker 1: zero response. That's why I say throwing him down the drain?
• 20:21
  Speaker 1: If for all I knew they were being held up
• 20:24
  Speaker 1: by the post office and this was going to investors
• 20:27
  Speaker 1: in your funds and clients of the firm and other
• 20:31
  Speaker 1: assorted well, yes, clients and friends, and nobody picked up
• 20:37
  Speaker 1: the response that because just so you know, in my office,
• 20:42
  Speaker 1: you put out a note and my head of research
• 20:45
  Speaker 1: comes up to me and said, hey, did you see
• 20:46
  Speaker 1: the marks letter? Yeah, of course I saw it this morning.
• 20:49
  Speaker 1: I'm on I'm on the list like anybody else. Who's
• 20:52
  Speaker 1: half smart has done none of that, you know, you know,
• 20:55
  Speaker 1: just crickets. As I recall it, there wasn't a response
• 20:58
  Speaker 1: in the first ten years, Akade. So you're just sending
• 21:01
  Speaker 1: these out into the void and literally nothing. And I
• 21:06
  Speaker 1: have no idea what kept me going, uh you know,
• 21:10
  Speaker 1: with that lack of a reward, no feedback, none, none.
• 21:15
  Speaker 1: But it had to be a the process itself had
• 21:17
  Speaker 1: to be somewhat of a reward of itself, yet enjoy it.
• 21:21
  Speaker 1: You clearly are a gifted writer or you like putting
• 21:23
  Speaker 1: words on paper. There had to be something, although I
• 21:26
  Speaker 1: would tell you it has to be a little funny
• 21:29
  Speaker 1: not here. So when did you first start to see
• 21:31
  Speaker 1: kind of like if you were on the radio and
• 21:33
  Speaker 1: you just spoke and nobody spoke back. By the way,
• 21:36
  Speaker 1: nobody is you should know that we're not broadcasting this.
• 21:39
  Speaker 1: This is just my own private collection. Uh So, so
• 21:43
  Speaker 1: what finally generates a response? When do you finally hear that, hey,
• 21:47
  Speaker 1: somebody is reading these thoughts. Well, I was working on
• 21:49
  Speaker 1: a memo and I put it out on the first
• 21:50
  Speaker 1: day of two thousand and it was called bubble dot com.
• 21:54
  Speaker 1: And basically what it said is that there's so much
• 21:57
  Speaker 1: buzz and hype around technology that I think it's overdone,
• 22:00
  Speaker 1: and I think it's going to cause a problem for
• 22:02
  Speaker 1: the people who are following it blindly. And that memo
• 22:08
  Speaker 1: had too virtues. It was right, and it was right soon.
• 22:14
  Speaker 1: Being right is not enough, because if it takes you
• 22:16
  Speaker 1: to three four years to be right, everybody's forgotten you
• 22:19
  Speaker 1: by the time the events, Uh comply with your forecast.
• 22:24
  Speaker 1: But trading right plus early equals wrong. Right. But you know,
• 22:32
  Speaker 1: the the tech stocks collapsed sometime around the second quarter
• 22:36
  Speaker 1: of two thousand and and, as I think I wrote
• 22:40
  Speaker 1: in the introduction to my book, after ten years, I
• 22:42
  Speaker 1: became an overnight success. There you go. You're listening to
• 22:45
  Speaker 1: Masters in Business on Bloomberg Radio. My special guest today
• 22:49
  Speaker 1: is Howard Marks. He is the founder and chairman of
• 22:53
  Speaker 1: Oaktree Capital. We were talking about Wall Streets obsession with forecast.
• 22:58
  Speaker 1: Let me let me give you a quote of yours,
• 23:01
  Speaker 1: and I'm I'm paraphrasing slightly. Uh. When it comes to investing,
• 23:06
  Speaker 1: we are concerned with actually one thing, dealing with the future.
• 23:10
  Speaker 1: Yet it's clearly impossible to know anything about the future.
• 23:15
  Speaker 1: You can't predict, you can only prepare So the first
• 23:18
  Speaker 1: question is why is the financial industry so in love
• 23:21
  Speaker 1: with forecasts? And the second question is what can investor
• 23:25
  Speaker 1: do about it? Well, if I was competing for a
• 23:29
  Speaker 1: piece of business, and I walked into your living room
• 23:31
  Speaker 1: and I said, you know, look, very I really have
• 23:36
  Speaker 1: no idea what's going to happen in the markets, in
• 23:38
  Speaker 1: the economies, or in rates and in the coming year.
• 23:41
  Speaker 1: And the next guy comes in he says, I'll tell
• 23:43
  Speaker 1: I know exactly what's gonna happen. You know that guy,
• 23:45
  Speaker 1: I'll get the business ninety odd percent of the time. Now,
• 23:50
  Speaker 1: the truth is he'll give you the business because because
• 23:53
  Speaker 1: because he doesn't know any better than I do. But
• 23:56
  Speaker 1: you know, nobody likes totally ambiguity. Um. And yet you
• 24:02
  Speaker 1: know Mark Twain said, it's not what you don't know
• 24:05
  Speaker 1: that gets you into trouble, it's what you know for
• 24:07
  Speaker 1: certain that just ain't true. I think it's much more
• 24:10
  Speaker 1: valid and much more prudent to admit when you don't
• 24:16
  Speaker 1: know something than to act as if you do. To
• 24:19
  Speaker 1: say the least, I'm I'm fond of looking at current
• 24:24
  Speaker 1: situations and going back a year to say, hey, how
• 24:27
  Speaker 1: many people last saw the we're saying, by the way,
• 24:30
  Speaker 1: oil is going to get cut in half. Nobody said
• 24:32
  Speaker 1: anything like that. Nobody said in advance Russia's invading the Ukraine.
• 24:37
  Speaker 1: People had idea there were issues with with Greece. I
• 24:40
  Speaker 1: don't think a lot of people were saying, hey, get
• 24:42
  Speaker 1: ready for a full on bear market in China after
• 24:45
  Speaker 1: the market doubles the first six months of this year, right, So,
• 24:49
  Speaker 1: so no doubt that that's a that's a process. Here's
• 24:53
  Speaker 1: another quote of yours that I really enjoy. We can
• 24:56
  Speaker 1: make excellent investment decisions on the basis of present observations
• 25:01
  Speaker 1: with no need to make guesses about the future. Well,
• 25:06
  Speaker 1: you know, I believe what are my mottos for myself
• 25:09
  Speaker 1: is that we never know where we're going, but we
• 25:12
  Speaker 1: sure as hell order know where we are. We don't
• 25:15
  Speaker 1: know what's going to happen in the economy, we don't
• 25:16
  Speaker 1: know what's going to happen in the market next year,
• 25:18
  Speaker 1: but we can have a sense for the whether the
• 25:23
  Speaker 1: market environment is hostile or friendly from what's going on
• 25:27
  Speaker 1: around us. What are other people doing, what are they thinking,
• 25:31
  Speaker 1: how are they acting? Um are are are the people
• 25:35
  Speaker 1: on radio and TV shows wildly bullish? Or are they
• 25:40
  Speaker 1: very cautious. When they're wildly bullish, we should be worried.
• 25:43
  Speaker 1: When they're cautious, we can turn aggressive, you know. Uh.
• 25:47
  Speaker 1: Warren Buffett says, the less prudence with which others conduct
• 25:50
  Speaker 1: their affairs, the greater the prudence with which we must
• 25:53
  Speaker 1: conduct our own affairs. So if we know that people
• 25:55
  Speaker 1: are throwing money at wild leverage straw sured speculative deals,
• 26:03
  Speaker 1: then we know that we're in an overheated environment, and
• 26:07
  Speaker 1: we should turn cautious. And I think that using indicators
• 26:10
  Speaker 1: like like those can work. Nobody gets timing exactly right.
• 26:16
  Speaker 1: But the question is, uh, can you improve upon a
• 26:20
  Speaker 1: buy and hold approach? Can you improve upon the faulty
• 26:25
  Speaker 1: uh timing that the herd engages in. It makes a
• 26:30
  Speaker 1: lot of sense. Um, here's another quote of yours that
• 26:33
  Speaker 1: I really like. I called called once called this extrapolation
• 26:37
  Speaker 1: to infinity. And you had said, rule number one, most
• 26:41
  Speaker 1: things proved to be cyclical. Rule number two. Some of
• 26:45
  Speaker 1: the greatest opportunities for gain and loss comes when other
• 26:48
  Speaker 1: people forget rule number one. Explain that, well, I mean,
• 26:52
  Speaker 1: when I was a kid in the early seventies, one
• 26:57
  Speaker 1: of my mentors described to me the three stage is
• 27:00
  Speaker 1: of a bull market. The first stage, when only a
• 27:03
  Speaker 1: few people believed that things could ever get better, the
• 27:06
  Speaker 1: middle stage, when most people understand that improvement is taking place,
• 27:10
  Speaker 1: and the last stage, when everybody believes things will get
• 27:13
  Speaker 1: better forever. So the point is, uh, you should know
• 27:18
  Speaker 1: which stage you're in, and you should act accordingly. And
• 27:22
  Speaker 1: if you if it's hard to get in in the
• 27:26
  Speaker 1: first stage but desirable but dangerous to get in or
• 27:31
  Speaker 1: stay in in the latter stage, And the question is
• 27:34
  Speaker 1: can you figure that out? And I believe you can,
• 27:37
  Speaker 1: which leads us to a question. Here we are in
• 27:40
  Speaker 1: mid two thousand fifteen, what stage of the bull market
• 27:43
  Speaker 1: are we in? Um? Well, first of all, it depends
• 27:48
  Speaker 1: on which market you're talking about. You most people talk
• 27:50
  Speaker 1: about the stock market, I think in terms of the
• 27:52
  Speaker 1: credit market or the debt market. So let's let's talk
• 27:54
  Speaker 1: about both. Okay, Okay, Well, first of all, let me
• 27:58
  Speaker 1: say that the U. S economy is going okay. It
• 28:01
  Speaker 1: We have a gradual, unsteady, halting, unimpressive, but intact recovery
• 28:10
  Speaker 1: and no reason to think that's gonna stop anytime. So,
• 28:13
  Speaker 1: so what we call in the business the fundamentals are
• 28:17
  Speaker 1: a relatively intact in this country. I don't even want
• 28:19
  Speaker 1: to go abroad yet. Uh. Then we have to look
• 28:25
  Speaker 1: at investor psychology. Uh, and then we have to look
• 28:28
  Speaker 1: at valuations. Psychology is a little bit on the positive side.
• 28:33
  Speaker 1: I don't think too many people are very excited about
• 28:35
  Speaker 1: the future. They're too I don't think too many people
• 28:37
  Speaker 1: are excited about buying today. Um, and yet they are buying.
• 28:42
  Speaker 1: Why I call them handcuffed volunteers. People can't keep money
• 28:46
  Speaker 1: in cash, they can't be money in the bank, they
• 28:48
  Speaker 1: can't keep it in money market funds because they get
• 28:49
  Speaker 1: a return of zero. They can't buy treasuries that yield
• 28:52
  Speaker 1: one or two. So they go out on the risk
• 28:55
  Speaker 1: curve and they buy things that historically maybe they haven't
• 28:58
  Speaker 1: bought because they're so satisfy with returns of zero, one
• 29:02
  Speaker 1: or two. So there is no alternative form of invitment.
• 29:06
  Speaker 1: And and and so in that context, people look for
• 29:08
  Speaker 1: what they call good relative buys. Well, this is I
• 29:12
  Speaker 1: like this because it's not as bad as that. You know,
• 29:15
  Speaker 1: do you really want to buy something for your investment
• 29:17
  Speaker 1: portfolio because it's not as bad as something else? No? Uh,
• 29:21
  Speaker 1: you know, we'd like to buy great buys, and then
• 29:25
  Speaker 1: we have to look at price, and the answer is
• 29:27
  Speaker 1: on price, there's very little out there today which is
• 29:29
  Speaker 1: a great buy. You know, the goal of the value investor,
• 29:33
  Speaker 1: our goal at oak Tree, the goal of Bruce Carsh's
• 29:36
  Speaker 1: distress debt funds, which you described, is to buy things
• 29:39
  Speaker 1: for less than their worth. There's very little that you
• 29:42
  Speaker 1: can buy today for less than its worth? Is that
• 29:45
  Speaker 1: true on the debt side as well as the equality?
• 29:47
  Speaker 1: Think it very much is. So we're we're fully valued
• 29:50
  Speaker 1: on on equity, were fairly valued on debt. So where
• 29:54
  Speaker 1: do you look to find value? Well, that's the answer
• 29:58
  Speaker 1: is there's nothing easy today. I would I describe you
• 30:02
  Speaker 1: asked where are we in the cycle? I say that
• 30:05
  Speaker 1: most assets are on what I call the high side
• 30:07
  Speaker 1: affair high side of fair Yeah, and and in other words,
• 30:12
  Speaker 1: there's nothing which is which which you can buy at
• 30:16
  Speaker 1: or below fair value. Most things are above fair value,
• 30:20
  Speaker 1: some are at the high part of the fair range,
• 30:22
  Speaker 1: and some are at the beginning part of the expensive range.
• 30:25
  Speaker 1: But there are no pronounced bargains. Um, what do you
• 30:29
  Speaker 1: do in that environment? Well, it's tough. You can go defensive,
• 30:35
  Speaker 1: but if the economy is gonna hold together for another
• 30:37
  Speaker 1: few years. Uh, you know, a high degree of defense
• 30:41
  Speaker 1: today and putting money in cash at a return of
• 30:43
  Speaker 1: zero is not going to be very satisfactory. So the
• 30:46
  Speaker 1: answer is you put money to work, but you do
• 30:49
  Speaker 1: it carefully, selectively, careful for for the last four years.
• 30:53
  Speaker 1: I think it's four years now. Almost of the day, Barry,
• 30:56
  Speaker 1: the mantra at oak Tree has been moved forward. But
• 30:59
  Speaker 1: with Ocean, I believe that that the outlook is not
• 31:04
  Speaker 1: so bad and prices are not so high that you
• 31:08
  Speaker 1: can't be invested if But on the other hand, the
• 31:11
  Speaker 1: outlook is not so good and prices are not so
• 31:14
  Speaker 1: low that you should be doing it with any aggressiveness.
• 31:17
  Speaker 1: I think you must. The real key question before you
• 31:21
  Speaker 1: get to the granular question of exactly which stocks to buy,
• 31:24
  Speaker 1: which bonds to buy in which companies. The key question
• 31:27
  Speaker 1: at any given point in time is should your portfolio
• 31:30
  Speaker 1: be aggressive or defensive? What balance do you strike? If
• 31:35
  Speaker 1: you get that wrong, you're not going to succeed, no
• 31:37
  Speaker 1: matter if you're a good stock picker, And if you
• 31:38
  Speaker 1: get it right, you will succeed even if you're a
• 31:41
  Speaker 1: bad stock picker. So the point is, should be aggressive
• 31:44
  Speaker 1: or defensive today, And I would I think personally that
• 31:47
  Speaker 1: you should favor defense. Not exclusively defense, but I think
• 31:53
  Speaker 1: you should favor defense. So you're a little more balanced
• 31:55
  Speaker 1: in in your perspective in terms of both aggressiveness and defense.
• 32:00
  Speaker 1: But I'm but still I'm favoring defense. I'm not balanced.
• 32:02
  Speaker 1: I'm not. So you're leaning a little more defensive than you. Yes,
• 32:07
  Speaker 1: typically will you mentioned in passing psychology. Here's another quote
• 32:12
  Speaker 1: of yours I want to throw out related to that,
• 32:15
  Speaker 1: the biggest investing eras come not from factors that are
• 32:19
  Speaker 1: informational or analytical, but from those that are psychological. Just
• 32:24
  Speaker 1: about every investor has access to the exact same information
• 32:27
  Speaker 1: these days. That's describe this if you would. Well, another
• 32:30
  Speaker 1: way I put it is that the key disciplines for
• 32:33
  Speaker 1: investment success well, certainly they include accounting in finance, but
• 32:37
  Speaker 1: but they also include psychiatry. So you have to understand
• 32:40
  Speaker 1: your psyche, and you have to understand the psyche of
• 32:43
  Speaker 1: those around you, and what what is going on in
• 32:45
  Speaker 1: the marketplace. And uh and uh, I believe today that
• 32:51
  Speaker 1: people are coerced into buying risky securities because they don't
• 32:56
  Speaker 1: like the return prospects on safe securities and that this
• 33:00
  Speaker 1: has pushed up prices in the risky asset classes and
• 33:03
  Speaker 1: permitted um less sound deals to get done. And if
• 33:09
  Speaker 1: those things are true, that that mas. That's the source
• 33:12
  Speaker 1: of my caution today. So psychology not frothy, but valuation
• 33:18
  Speaker 1: fairly fully valued. So you're someone invested somewhat balanced, a
• 33:22
  Speaker 1: little bit on the defensive stuff. We're fully invested, but
• 33:27
  Speaker 1: but in cautious holdings. So if you'd like to hear
• 33:30
  Speaker 1: more of my conversation with Howard Marks, please check out
• 33:32
  Speaker 1: our podcast extras. You can find them on Apple, iTunes, SoundCloud,
• 33:37
  Speaker 1: and Bloomberg. I mentioned Howard's chairman's memos. Those are all
• 33:41
  Speaker 1: available at oak Tree Capital dot com. Be sure and
• 33:45
  Speaker 1: follow me on Twitter at Ridolts, and check out my
• 33:48
  Speaker 1: daily column on Bloomberg View dot com. I'm Barry Ridults.
• 33:51
  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Welcome
• 33:58
  Speaker 1: to the podcast portion of the show. Um, I'm sitting
• 34:02
  Speaker 1: here with Howard Marks. He is the founder and chairman
• 34:04
  Speaker 1: of oak Tree Capital. Howard, thank you so much for
• 34:07
  Speaker 1: for doing this. I really appreciate it. Well, I just
• 34:09
  Speaker 1: want to show my kids that I'm an early adapter.
• 34:11
  Speaker 1: Here you are, You're you're not only on radio, but
• 34:15
  Speaker 1: on Twitter and on periscope. Um, your kids will be
• 34:19
  Speaker 1: your kids will be impressed with that. So previously you
• 34:22
  Speaker 1: and I had a similar conversation at the Seattle cf A.
• 34:27
  Speaker 1: Was that the beginning of this year. That was um,
• 34:31
  Speaker 1: that was kind of fascinating because I'd only passed through Seattle,
• 34:35
  Speaker 1: I had previously, I had never stayed as long as
• 34:37
  Speaker 1: I did that week in Seattle. And that is a boomtown,
• 34:41
  Speaker 1: isn't it? Boomtown. It's a very nice place to live. Really,
• 34:44
  Speaker 1: really is delightful. The weather is delightful. We ended up
• 34:46
  Speaker 1: going to Bainbridge Island, which is about as nice a
• 34:49
  Speaker 1: place as uh, this half of the planet has to
• 34:52
  Speaker 1: as to offer. Let's some let's plow through some questions.
• 34:57
  Speaker 1: Uh that we had some stuff that I didn't get
• 34:59
  Speaker 1: to during the radio portion, and then we'll get into
• 35:02
  Speaker 1: some of my my favorite questions. So we did not
• 35:05
  Speaker 1: get to discuss the fact. I bet a lot of
• 35:08
  Speaker 1: people don't know that when you were at Trust Company
• 35:11
  Speaker 1: of the West, you supervise some kid named Jeffrey Gunlock.
• 35:15
  Speaker 1: There was a guy named Jeffrey Gunlack and and uh uh,
• 35:19
  Speaker 1: I don't know if the supervisor is the right term,
• 35:22
  Speaker 1: but I assisted him in my last year there, all right,
• 35:26
  Speaker 1: And then ultimately he uh he left Trust Company of
• 35:30
  Speaker 1: the West and called you and said, hey, it's not
• 35:33
  Speaker 1: it's something I want to do is go out on
• 35:35
  Speaker 1: my own. What do you suggest and and how did
• 35:38
  Speaker 1: you respond to Jeff? Well, uh, he actually went out
• 35:42
  Speaker 1: on his own. But the key is that he called
• 35:45
  Speaker 1: us uh and or had a representative call us and said,
• 35:50
  Speaker 1: would you help us get started? Would you you know
• 35:52
  Speaker 1: the big when I started oak Tree eight twenty years ago,
• 35:56
  Speaker 1: people would say, well, what's the biggest surprise? And the
• 35:58
  Speaker 1: big surprise is how much non investment stuff there is
• 36:00
  Speaker 1: to do personnel, premises, tax, insurance accounting. Uh. Yes, and
• 36:08
  Speaker 1: it's and so you know, Jeff said, can you help
• 36:10
  Speaker 1: us get started? Because you know tc W fired him
• 36:14
  Speaker 1: and he had no preparations made, and he wanted to
• 36:17
  Speaker 1: get up and running, and he didn't want to stumble
• 36:19
  Speaker 1: because then then people would say he wasn't able up
• 36:22
  Speaker 1: to the task. So so uh, we earned a piece
• 36:26
  Speaker 1: of his company double line by putting him in business Organizationally,
• 36:31
  Speaker 1: I'm going to assume that was a pretty good investment.
• 36:33
  Speaker 1: It was a good investment. And and then, and then,
• 36:35
  Speaker 1: and then we bought a further piece because we wanted
• 36:39
  Speaker 1: to get up to on the accounting rules. If you
• 36:41
  Speaker 1: have we can include our share of their profits. Uh,
• 36:46
  Speaker 1: it's called equity accounting. And so we wanted to be
• 36:48
  Speaker 1: a twenty and uh and we're our happy owners of
• 36:53
  Speaker 1: Double Line. It turns out Jeff was the first show
• 36:55
  Speaker 1: we had done here. And at the time, I think
• 36:57
  Speaker 1: he was coming up on sixty or seventy billion in
• 37:00
  Speaker 1: a u M in an incredibly fast time. I think
• 37:04
  Speaker 1: they just celebrated their fifth anniversary. Is that right? I
• 37:06
  Speaker 1: think that's not too long. Yeah, So that's really a
• 37:10
  Speaker 1: fascinating You know, you've mentioned very often cash is king
• 37:15
  Speaker 1: and opportunities come along. That has to be one of
• 37:18
  Speaker 1: those great examples of being there at the right place,
• 37:21
  Speaker 1: at the right time with cash, ready to to do
• 37:24
  Speaker 1: what you want to do. Well, it didn't. It didn't
• 37:26
  Speaker 1: take us much cash. It took us some expertise and
• 37:29
  Speaker 1: of course, uh, Jeff's trust in us to to that
• 37:34
  Speaker 1: he would get a good solid foundation, which I think
• 37:38
  Speaker 1: he did get. Um and it constitutes getting lucky. Barry,
• 37:41
  Speaker 1: you know that's right. As you and I were saying before,
• 37:45
  Speaker 1: it helps to be smart, but being smart is not enough.
• 37:49
  Speaker 1: You also have to catch a break. Lot lots of
• 37:51
  Speaker 1: smart guys. But smart plus preparation plus luck that that
• 37:55
  Speaker 1: that's certainly a secret. Speaking about preparation and not getting lucky.
• 38:01
  Speaker 1: We never mentioned earlier, but it was on my list
• 38:04
  Speaker 1: of things to talk about. You took a small piece,
• 38:07
  Speaker 1: if I'm reading this correctly, of oak Tree and did
• 38:10
  Speaker 1: an I p O with that. Yes, in two thousand
• 38:13
  Speaker 1: and twelve, how much of the company UM was listed
• 38:16
  Speaker 1: as a relatively small percentage of memories. Yes, I think
• 38:19
  Speaker 1: it was. I think it was about and we've heard
• 38:23
  Speaker 1: for the past ten years how arduous going public is
• 38:27
  Speaker 1: and all the headaches involving what motivated you to say,
• 38:30
  Speaker 1: all right, let's fight through that and become a public company.
• 38:34
  Speaker 1: We had always given ownership of the firm to the
• 38:38
  Speaker 1: employees from the very beginning. You know, we started off
• 38:41
  Speaker 1: there were five of us who owned a d At
• 38:43
  Speaker 1: the end of that first year, we brought in thirteen
• 38:46
  Speaker 1: more people into the ownership. And we've always had about
• 38:51
  Speaker 1: the employees owning, owning equity, the ones who could who
• 38:54
  Speaker 1: could really determine the future of the company, and we
• 38:57
  Speaker 1: thought they would want to have a way to number one,
• 39:01
  Speaker 1: know the value of their steak and number two monetize it. UH.
• 39:06
  Speaker 1: And you know, we use it as a compensation tool.
• 39:09
  Speaker 1: And if you're giving people equity, but they say, I,
• 39:12
  Speaker 1: how do I know what it's worth? And how do
• 39:13
  Speaker 1: I know you be able to get out? Then it
• 39:16
  Speaker 1: it doesn't have much power as a conversation tool. So
• 39:19
  Speaker 1: we thought that that that would be desirable. And then
• 39:22
  Speaker 1: for further generational transition UM, as my generation UM moves
• 39:28
  Speaker 1: on one of these days, I'd like to have a
• 39:31
  Speaker 1: way to monetize that value and part of it and
• 39:35
  Speaker 1: turn the rest of it over to the other employees.
• 39:37
  Speaker 1: So I think that public ownership played a key role
• 39:40
  Speaker 1: in that. But by the way, you mentioned making sure
• 39:43
  Speaker 1: that UH employees had a way to participate. That's a
• 39:47
  Speaker 1: theme I've heard from so many people who have passed
• 39:50
  Speaker 1: through here. Listen, these are the people who helped build
• 39:53
  Speaker 1: the firm. We want to make sure they're fully compensated
• 39:56
  Speaker 1: and and have a steak in the future success of
• 39:58
  Speaker 1: the company. It's a azing how consistently that concept comes
• 40:03
  Speaker 1: up time and time and time again. Well, I might
• 40:06
  Speaker 1: have something to do with the way you choose your guests. Okay,
• 40:10
  Speaker 1: so you're saying this is not a this is a
• 40:13
  Speaker 1: sample set error, this is not a a full on
• 40:16
  Speaker 1: random I think you may be onto something with that.
• 40:20
  Speaker 1: So so let's go to UM. There's a question I
• 40:24
  Speaker 1: ask all of my guests. But you've talked about this
• 40:27
  Speaker 1: question in the past, so I want to jump right
• 40:30
  Speaker 1: into this before I get into your book. And you
• 40:33
  Speaker 1: have suggested people read broadly. What's the significance of reading
• 40:40
  Speaker 1: to the investor, I think that you have to see
• 40:48
  Speaker 1: the whole world to understand the importance of things. You
• 40:53
  Speaker 1: have to understand other countries, other political systems, other monetary systems,
• 41:02
  Speaker 1: be they in place today or in history. UH. I
• 41:09
  Speaker 1: think you have to understand different disciplines, the sciences, UM,
• 41:15
  Speaker 1: and UH and so forth. UM. You have to understand
• 41:20
  Speaker 1: how people have thought over the years. UM. You have
• 41:23
  Speaker 1: to UM. You have to be able to see cycles,
• 41:27
  Speaker 1: and some of the important cycles of the world have
• 41:29
  Speaker 1: taken place in in decades and centuries. UM. And you're
• 41:33
  Speaker 1: not going to get that in the Wall Street General.
• 41:35
  Speaker 1: This more exactly, you need something with the full weight
• 41:38
  Speaker 1: of history written by somebody who's an expert in that
• 41:42
  Speaker 1: space exactly. So, UM, you know, if you, if you,
• 41:45
  Speaker 1: if you follow people like uh Warren Buffett and Charlie Monger,
• 41:49
  Speaker 1: they say, read broadly and and and the other thing
• 41:53
  Speaker 1: it does is it it's it just makes you think bigger.
• 41:56
  Speaker 1: You know, this business of figuring out whether a company's
• 41:59
  Speaker 1: gonna earn sixty six cents next quarter of sixty seven,
• 42:03
  Speaker 1: this is the bigger pictures. It doesn't help you cope
• 42:05
  Speaker 1: with the big pictures of life, big questions of life.
• 42:10
  Speaker 1: So so, aside from Dot and Graham, which I know
• 42:13
  Speaker 1: you have mentioned many times, UM, what other books did
• 42:17
  Speaker 1: you find influential? What else do you recommend investors should
• 42:21
  Speaker 1: be familiar with? UM? I have gotten a lot out
• 42:27
  Speaker 1: of a book called The Short History of Financial Euphoria
• 42:32
  Speaker 1: by John Kenneth Galbraith, UM Loved Fooled by Randomness by Nessa.
• 42:39
  Speaker 1: Nicholas teleb Um, um Against the Gods by Peter Bernstein,
• 42:48
  Speaker 1: which is really a story of of risk of risk
• 42:52
  Speaker 1: and how people evolved their understanding of risk and probability.
• 42:57
  Speaker 1: You know, you can only you you can only cope
• 43:00
  Speaker 1: with the world if you can see things probabilistically. I
• 43:04
  Speaker 1: think it's you know you you you've talked about my
• 43:06
  Speaker 1: dislike of forecast. I don't like people who say this
• 43:10
  Speaker 1: is what's going to happen next year. You put a
• 43:12
  Speaker 1: probability on it, as long as that's a will considered
• 43:15
  Speaker 1: probability just because it rained. If you say chance of
• 43:19
  Speaker 1: a sunny day doesn't mean you're wrong. It means the
• 43:22
  Speaker 1: ten percent outcome. But so you you you shouldn't say
• 43:25
  Speaker 1: this is going to happen. I'm sure, but you also
• 43:28
  Speaker 1: shouldn't say three different things can happen. I have no
• 43:31
  Speaker 1: idea which you'll be. You know you have to make
• 43:33
  Speaker 1: a judgment about likelihoods and probabilities. That's how you have
• 43:38
  Speaker 1: to live your life. You know you. You decided whether
• 43:42
  Speaker 1: or not to take an umbrella this morning be based
• 43:44
  Speaker 1: on the probability of rain. Chance of rain at two o'clock.
• 43:49
  Speaker 1: I have an umbrella only because now I'm in a
• 43:52
  Speaker 1: suit and tie. So the downside of was this gets
• 43:56
  Speaker 1: ruined if I'm in jeans and a shirt. Maybe you
• 43:58
  Speaker 1: don't care. Maybe you take the umbrella if it's if
• 44:01
  Speaker 1: it's eighty right, that's right, Okay? So I think you
• 44:06
  Speaker 1: know during the radio interview, you mentioned UH something, which
• 44:12
  Speaker 1: was the title of one of my memos, You can't predict,
• 44:15
  Speaker 1: you can prepare. That was the tagline for I think
• 44:18
  Speaker 1: it was. I think it was Mass Mutual's advertising program
• 44:23
  Speaker 1: a dozen years ago, and I stole it for a
• 44:26
  Speaker 1: memo because it's true, we don't know what's going to
• 44:28
  Speaker 1: happen in the future, but we have to prepare for
• 44:33
  Speaker 1: the things that may happen. We can't prepare for everything
• 44:37
  Speaker 1: that may happen, so we have to do it probabilistically.
• 44:40
  Speaker 1: And that's what Against the Gods was really about. So
• 44:42
  Speaker 1: you're preparing for the likely outcomes. What do you have
• 44:45
  Speaker 1: to do about preparing for the you mentioned full by randomness?
• 44:49
  Speaker 1: What do you do to prepare for the black swans?
• 44:52
  Speaker 1: The highly improbable but enormously disruptive possible outcomes what I
• 44:57
  Speaker 1: call the improbable disaster? And one of the most interesting
• 45:01
  Speaker 1: questions in investing is what do you do about the
• 45:04
  Speaker 1: improbable disaster? Uh? You can't prepare for every eventuality. If
• 45:09
  Speaker 1: you ensure, if you spend money for insurance premiums against
• 45:14
  Speaker 1: every possible outcome, then you will have protected against every
• 45:19
  Speaker 1: negative outcome and you'll have no money left, right, So
• 45:22
  Speaker 1: so it's it's really interesting. You have to you have to, uh,
• 45:29
  Speaker 1: maybe there are some possible courses of action which offer
• 45:36
  Speaker 1: an attractive expected value on average, but which entail some
• 45:41
  Speaker 1: outcomes that you absolutely can't stand. Maybe you just avoid that. Uh.
• 45:45
  Speaker 1: You know, I always say that I'm not interested in
• 45:47
  Speaker 1: being a skydiver who was successful at the time. Uh,
• 45:53
  Speaker 1: So I don't skydive. Um. But then you you say
• 45:59
  Speaker 1: in some ca says that's a risk I can live with.
• 46:02
  Speaker 1: That's I either don't think it's going to happen, or
• 46:04
  Speaker 1: if it does happen, I don't think the consequences will
• 46:07
  Speaker 1: be uh unbearable. And then you take those concuences. We
• 46:10
  Speaker 1: face that back in oh eight, we had the big
• 46:12
  Speaker 1: eleven billion dollar fund you were talking about and the
• 46:15
  Speaker 1: distressed asset fund. That's right, and we're investing in the
• 46:19
  Speaker 1: aftermath of the Lehman meltdown when everybody thought the world
• 46:22
  Speaker 1: was gonna end. That was that was an improbable disaster.
• 46:29
  Speaker 1: We concluded that we would invest nevertheless. So so you
• 46:33
  Speaker 1: mentioned um a short history of financial euphoria, You mentioned
• 46:38
  Speaker 1: Fooled by Randomness? What other books really come to mind?
• 46:42
  Speaker 1: You know, I have on my night table Charlie Monger's
• 46:47
  Speaker 1: um port Charlie's Almanac, which is which is this this thing?
• 46:51
  Speaker 1: And I'm saving it for the winter because the weather
• 46:53
  Speaker 1: has been Peter Kaufman did a great job on the
• 46:56
  Speaker 1: Almanac and and he conveys a lot of wisdom. Um.
• 47:00
  Speaker 1: I think, I think that's a really good idea. UM.
• 47:03
  Speaker 1: I know you had mentioned other things of Buffett you
• 47:06
  Speaker 1: put out your letters Buffets Annual Letters or something else
• 47:09
  Speaker 1: that you have mentioned. You really enjoyed everything. They're great. Um,
• 47:13
  Speaker 1: They're really great. There's a book out called The Warren
• 47:16
  Speaker 1: Buffett Way for people who are interested in Carol Loomis No,
• 47:20
  Speaker 1: no Carol No. I think was Bob Haxtrom who wrote
• 47:26
  Speaker 1: and and uh. I think we're on the fourth edition
• 47:29
  Speaker 1: of The Warren Buffett Way now and uh and Bob
• 47:32
  Speaker 1: asked me to write the the introduction really the book,
• 47:36
  Speaker 1: and so I did an interest what I thought it
• 47:38
  Speaker 1: was an interesting thing? I said, what is it? My
• 47:40
  Speaker 1: theme was what makes Buffett Buffett? Uh? And that's what
• 47:43
  Speaker 1: the introduction is about. Have you ever gone to any
• 47:46
  Speaker 1: of the Buffett Annual events. I did go to one.
• 47:49
  Speaker 1: What was that like? Well, it's it's a it's a
• 47:52
  Speaker 1: cultural phenomenon, you know, it's the scale is great, the
• 47:57
  Speaker 1: atmosphere is great. Everybody it's a. It's a. It's a
• 48:02
  Speaker 1: you know, it's a. It's a whole full of happy people,
• 48:05
  Speaker 1: of good feeling. You know. The the adulation of of
• 48:11
  Speaker 1: Warren and Charlie is something to behold. I can imagine
• 48:15
  Speaker 1: lots of people. They've made lots of people very very
• 48:18
  Speaker 1: let's call it comfortable over the decades, and and that
• 48:21
  Speaker 1: would that sort of response wouldn't surprise me. You know.
• 48:24
  Speaker 1: One of the things I found fascinating in your background
• 48:28
  Speaker 1: is you minored in Japanese studies. Did that ever come
• 48:31
  Speaker 1: in handy with anything? And I'm gonna put a stop
• 48:35
  Speaker 1: on this because We've been going so long with this,
• 48:38
  Speaker 1: I don't want to give away too much of Well,
• 48:43
  Speaker 1: I think it hates. I think it helped shape who
• 48:46
  Speaker 1: I am, for one thing, and it helped shape the
• 48:49
  Speaker 1: way I think. Uh, in what way? How did how
• 48:53
  Speaker 1: did you study? The main thing was there's an element
• 48:58
  Speaker 1: in Happanese philosophy called mujo and uh it's kind of uh.
• 49:07
  Speaker 1: The literal translation is the turning of the will of
• 49:09
  Speaker 1: the law. The turning of the wheel of the law.
• 49:13
  Speaker 1: And in other words, uh, nothing ever stays the same.
• 49:18
  Speaker 1: Change and impermanence are are are forever. And I think
• 49:25
  Speaker 1: that it's very good to understand, uh, that that things
• 49:32
  Speaker 1: don't go on forever as they are, that there will
• 49:36
  Speaker 1: be change, and to prepare for and adapt to it.
• 49:40
  Speaker 1: So I never heard the term mujo, but it certainly
• 49:42
  Speaker 1: reminds me of Heroiclydus. The only constant is changed. It's
• 49:47
  Speaker 1: it's a similar philosophy. Um. So earlier you also mentioned
• 49:52
  Speaker 1: one of your mentors had advised you about the three
• 49:56
  Speaker 1: phases of a bull market. Who who were your early mentors? Oh,
• 50:03
  Speaker 1: just the people I worked with at that city, the
• 50:06
  Speaker 1: people I met in the investment business back in back
• 50:08
  Speaker 1: in the early seventies, as I recall, you know, it's
• 50:12
  Speaker 1: a long time to remember, Barry, but we have to.
• 50:14
  Speaker 1: I think we used to have a group called the
• 50:16
  Speaker 1: third Third Day Group, the Third Thursday, which met for
• 50:19
  Speaker 1: lunch on the third Thursday of every month, you know,
• 50:23
  Speaker 1: And I was let's say it was seventy three, I
• 50:25
  Speaker 1: means I was twenty seven years old. I was a kid,
• 50:27
  Speaker 1: but I got to hang out with Lee Cooperman, who
• 50:30
  Speaker 1: I know was one of your guests. And uh, I
• 50:33
  Speaker 1: was saying earlier, he's a boy from the Bronx, You're
• 50:35
  Speaker 1: a boy from Queen's right. We're keeping it local. So
• 50:38
  Speaker 1: Lee Cooperman was part of that Third Thursday. As I
• 50:40
  Speaker 1: recall again it's a long time ago, but you know,
• 50:43
  Speaker 1: the people from from Cumberland Group, which was one of
• 50:46
  Speaker 1: the uh one of the early hedge funds, and uh
• 50:51
  Speaker 1: maybe Steinhardt Finer Berkwitz and mating people like like you know,
• 50:58
  Speaker 1: and uh maybe Carnie Awson who was at Jennison. Jennison
• 51:02
  Speaker 1: was the first institutional investment boutique formed around the sixty nine,
• 51:07
  Speaker 1: as I recall, or eight, and uh, you know, yeah,
• 51:12
  Speaker 1: I didn't have a I didn't have a anybody whose
• 51:16
  Speaker 1: knee I sad on. I didn't have any one person
• 51:19
  Speaker 1: uh that that, But I just I was lucky to
• 51:23
  Speaker 1: hang around with a bunch of smart people and pick
• 51:26
  Speaker 1: up snippets here and there. You strike me as a
• 51:29
  Speaker 1: very astute observer of both human nature and other investors.
• 51:33
  Speaker 1: And I suspect you were. You were picking little bits
• 51:36
  Speaker 1: and pieces off of all those guys. Maybe a magpie. Okay,
• 51:42
  Speaker 1: that was not what I was thinking of. But if
• 51:44
  Speaker 1: you want to go with Magpie, I'm happy with that.
• 51:47
  Speaker 1: So those are the investors who who helped Were they formative,
• 51:51
  Speaker 1: they helped shallp shape your view or these people who
• 51:54
  Speaker 1: kind of added minor course corrections over time I think
• 51:59
  Speaker 1: helped change shape my view, you know. I mean it's
• 52:02
  Speaker 1: it's it's really intangibles. Uh. You know. I I have
• 52:06
  Speaker 1: all these adages that I use, and you know, I
• 52:11
  Speaker 1: can't remember who gave him to me, but I got
• 52:13
  Speaker 1: to ended up with quite a collection of those, and
• 52:15
  Speaker 1: they come in very handy. Uh. And then just you
• 52:18
  Speaker 1: you you watch people think, you know, I mean you
• 52:23
  Speaker 1: watch people think, or maybe you should say listen to
• 52:26
  Speaker 1: people think. But I mean, you know, maybe maybe thirty
• 52:29
  Speaker 1: five or forty years ago, uh, listening to how Lee
• 52:34
  Speaker 1: Cooperman uh analyzed Henry Singleton and tele Dine. You know,
• 52:41
  Speaker 1: he used that as an example one of his face
• 52:44
  Speaker 1: when he was at Goldman SAX. I've heard that example
• 52:48
  Speaker 1: from other people, and the great thing about it is
• 52:51
  Speaker 1: that nobody liked tele Dine. Henry was was not one
• 52:55
  Speaker 1: of these managements who gave out forecasts breakdowns of prophets.
• 52:58
  Speaker 1: He said you're on your own. And I went to
• 53:00
  Speaker 1: see him on my first business trip in my life
• 53:02
  Speaker 1: nine and and you know, we said, well, yes, could
• 53:06
  Speaker 1: you tell us what you're gonna earn per year for
• 53:07
  Speaker 1: the next five years? This was, you know, common question
• 53:10
  Speaker 1: or management. We could you break down your earnings by
• 53:14
  Speaker 1: by by division? And and Henry said, that's your job,
• 53:18
  Speaker 1: I run the company. Uh. And most people didn't like that.
• 53:21
  Speaker 1: Most people thought he was crusty. He was crusty, Uh,
• 53:24
  Speaker 1: but with the reason to be to not say, let
• 53:27
  Speaker 1: me chew your food for you, your analyst with the number. Well,
• 53:30
  Speaker 1: the other thing is that, you know, uh, most managements
• 53:33
  Speaker 1: want their stocks to go up because they have options
• 53:36
  Speaker 1: or what have you. I think Henry wanted the stock
• 53:38
  Speaker 1: to go down so that he could buy out the public.
• 53:42
  Speaker 1: And you know, he started off as a paid employee
• 53:45
  Speaker 1: of the company and he ended up as a very
• 53:48
  Speaker 1: major shareholder at the end because he used the month
• 53:51
  Speaker 1: company's money to buy back a lot of stock uh
• 53:55
  Speaker 1: from the public at low prices. He did he realized
• 53:58
  Speaker 1: that his he had that are interest in having the
• 54:01
  Speaker 1: stock be low than high. There's a great book out
• 54:04
  Speaker 1: now called Outsiders. I don't know if you're aware of that.
• 54:07
  Speaker 1: It's about it's about eight Maverick CEOs and how they
• 54:12
  Speaker 1: ran their companies. Uh. And he's one. Uh and he's
• 54:15
  Speaker 1: one of he's the he's the leader, he's the man.
• 54:17
  Speaker 1: He's chapter one and how to tell the Telegugne story
• 54:20
  Speaker 1: ultimately end well, the tell Dine story ended up that
• 54:24
  Speaker 1: that he owned it, ended up owning a major piece
• 54:26
  Speaker 1: of the company, and the stock ended up being very valuable.
• 54:30
  Speaker 1: We weren't they ultimately am I misremembering this? Weren't they
• 54:33
  Speaker 1: taken out by somebody? Or well? I think they were
• 54:37
  Speaker 1: taking out taken out in pieces? Yes, But of course
• 54:40
  Speaker 1: tele digne is is is it? Name doesn't exist anymore
• 54:45
  Speaker 1: as far as I know. No, I think you're right. Yeah,
• 54:48
  Speaker 1: well we'll have to we'll have to look at But
• 54:49
  Speaker 1: I mean he viewed as he viewed a capital as
• 54:54
  Speaker 1: a tool that you can that you can use to
• 54:59
  Speaker 1: the betterment the company. And you you you you can
• 55:02
  Speaker 1: you can use it to buy the stock back when
• 55:05
  Speaker 1: it's cheap, not when it's expensive. And you don't do
• 55:08
  Speaker 1: buy backs when the stock is high, and you don't
• 55:11
  Speaker 1: do acquisitions with stock when the stock is low. So
• 55:14
  Speaker 1: and then and these people in the in the people
• 55:17
  Speaker 1: who follow outsiders and follow this movement, they're called capital
• 55:22
  Speaker 1: allocators and and this is a very good way to
• 55:28
  Speaker 1: manage a company. I think we've we've seen so much
• 55:31
  Speaker 1: in terms of stock buy backs the past few years
• 55:35
  Speaker 1: after you've run up in the markets. Um, what's your
• 55:38
  Speaker 1: thoughts on on share buy backs lately? Because history tells
• 55:42
  Speaker 1: us that management has a tendency to overpay for their
• 55:45
  Speaker 1: own stock, and when stocks are cheap, they have a
• 55:49
  Speaker 1: tendency to be a little timid and not want to
• 55:51
  Speaker 1: look stupid when every hey conserve your cash as opposed
• 55:55
  Speaker 1: to saying my stock is cheap on buying it here? Well,
• 55:57
  Speaker 1: probably just like mother ridholds. My mother said by low
• 56:02
  Speaker 1: sell high, and why would you do the opposite? It's
• 56:07
  Speaker 1: easier to do them. It's easier, it's comfortable, it's emotionally,
• 56:11
  Speaker 1: you know, it takes a lot of off to tell you,
• 56:14
  Speaker 1: guys who are out buying stock when when you were
• 56:16
  Speaker 1: raising the distressed funds, did you get feedback from clients
• 56:21
  Speaker 1: you'r or from potential investors? Hey, listen, I know you've
• 56:25
  Speaker 1: got a great track record, but you're crazy. The world
• 56:27
  Speaker 1: is coming to an end, like, did you get pushed back? Well, no,
• 56:31
  Speaker 1: the main the main pushback we got, Remember we started
• 56:35
  Speaker 1: to raise the funding, oh seven and um, and the
• 56:39
  Speaker 1: main pushback we got in the beginning of seven it
• 56:42
  Speaker 1: was there's not going to be any distress. The world
• 56:45
  Speaker 1: is too good. You know, everything's going smoothly, and it's
• 56:48
  Speaker 1: going to go smoothly forever. And that was a year
• 56:50
  Speaker 1: after housing had already begun to roll over. Yes, but
• 56:53
  Speaker 1: nobody took notice, right, And I think some subprime subridy
• 56:58
  Speaker 1: more well subprime more goages began to soften in uh
• 57:04
  Speaker 1: the first or second quarter of or six, and but
• 57:07
  Speaker 1: they people didn't generalize it to the rest of the world,
• 57:10
  Speaker 1: and nobody said, well just a minute there, people applied
• 57:13
  Speaker 1: terribly weak standards in extending subprime mortgages. Maybe they extended
• 57:17
  Speaker 1: we maybe they applied weak standards every place. So what
• 57:21
  Speaker 1: does that mean? If if this weak mortgagees everywhere, that's
• 57:25
  Speaker 1: a negative, of course, but also it implies to me,
• 57:29
  Speaker 1: it implied that the system had been faulty because people
• 57:33
  Speaker 1: had been making uh bad decisions and they and they
• 57:36
  Speaker 1: weren't making him in just one place, I mean, Oaktree
• 57:38
  Speaker 1: turned very cautious in oh uh four five six, Why, Well,
• 57:50
  Speaker 1: on everything we do. Uh, but most of what we
• 57:54
  Speaker 1: do is debt. But we turned very cautious. Why because
• 57:58
  Speaker 1: we saw what we thought were ridiculously unsafe deals being issued.
• 58:03
  Speaker 1: And you know, I would walk into Bruce's office, my
• 58:06
  Speaker 1: partner Sheldon, my partner Larry, and Richard, and we would say,
• 58:10
  Speaker 1: look at this piece of John, can you believe this
• 58:12
  Speaker 1: got issued. There's something wrong if a deal like this
• 58:16
  Speaker 1: can get issued. And so again understanding what's going on
• 58:19
  Speaker 1: around us. If we're in an environment in which faulty
• 58:23
  Speaker 1: deals can readily be issued, there's something wrong with the environment.
• 58:27
  Speaker 1: What's amazing is how long it takes from the recognition
• 58:32
  Speaker 1: of hey, this is a lot of junks till the
• 58:34
  Speaker 1: rest of the world figures it out. It literally takes years. Well,
• 58:38
  Speaker 1: you know, somebody that famous, somebody I can't remember who
• 58:42
  Speaker 1: it was. One said, Uh, it takes a lot longer
• 58:47
  Speaker 1: for things to happen then you think it could. But
• 58:51
  Speaker 1: then they happen much faster than you think they will.
• 58:54
  Speaker 1: You know, makes perfect sense. Yes, you're right, things things
• 58:59
  Speaker 1: don't it through to investors, uh, other than very slowly.
• 59:04
  Speaker 1: But then when everybody has that ah moment and says,
• 59:09
  Speaker 1: you know we're in trouble. Then the collapse comes quite fast.
• 59:14
  Speaker 1: Think back to the famous irrational xuberans speech in you
• 59:19
  Speaker 1: still had four more years of market upside before a
• 59:23
  Speaker 1: pretty fast and furious collapse there there too. I wonder
• 59:26
  Speaker 1: if that that three to four year number is is
• 59:29
  Speaker 1: because you said in O four you started to become cautious.
• 59:34
  Speaker 1: It's a it's a sample set of two, but that
• 59:36
  Speaker 1: that run of four years after looking back after the fact,
• 59:40
  Speaker 1: seems to be kind of an interesting coincidence. It's a
• 59:43
  Speaker 1: small sample. But but but you're right. I mean, look
• 59:46
  Speaker 1: when Alan Greensband said I I I believe I detect
• 59:50
  Speaker 1: signs of irrational exuberance. That was at six thousand, and
• 59:53
  Speaker 1: it exceeded ten. Right. Uh, if I have my numbers
• 59:58
  Speaker 1: right now, that's about yeah. So you know, and the people.
• 1:00:02
  Speaker 1: The point is that anybody who listened to green Span
• 1:00:04
  Speaker 1: and in six thousand got out of the market by
• 1:00:08
  Speaker 1: oh nine, people ruled him an idiot. Uh. And by
• 1:00:12
  Speaker 1: the way, everybody had Buffett written off at the beginning
• 1:00:15
  Speaker 1: of two thousand because they said he's passed his cell
• 1:00:17
  Speaker 1: by date. You know, he's missed his tech bubble. What's
• 1:00:21
  Speaker 1: wrong with him? This this value investing is you know,
• 1:00:23
  Speaker 1: that's old school. That's not gonna art anymore. Well, the
• 1:00:26
  Speaker 1: greatest quote you know comes from Galbrai's uh, Short History
• 1:00:30
  Speaker 1: of Financial Euphoria, and he says the he talks about
• 1:00:33
  Speaker 1: the the short comings of the markets. He says, one
• 1:00:37
  Speaker 1: is the is the limited span of memory. Uh. And
• 1:00:44
  Speaker 1: he says that anybody who remembers the old bad events
• 1:00:48
  Speaker 1: and cautions against the recurrence is dismissed as past their prime.
• 1:00:53
  Speaker 1: Uh and uh and old basically an old foggy here.
• 1:00:56
  Speaker 1: That's my turn, not his. Uh. And then you get
• 1:00:58
  Speaker 1: a reminder that history is elevant. Right. There's another quote,
• 1:01:02
  Speaker 1: and I don't remember with Galbraith or someone else who said,
• 1:01:04
  Speaker 1: one of the distinguishing characteristics about people in finance is
• 1:01:08
  Speaker 1: their steadfast refusal to learn from history. And it's really true.
• 1:01:13
  Speaker 1: It's in oh seven o eight, it was as if
• 1:01:15
  Speaker 1: two thousand had never happens. Well, all of six years
• 1:01:18
  Speaker 1: had passed. But you know that the point is that
• 1:01:22
  Speaker 1: this this dismissal of the past has helpers, has handmaidens,
• 1:01:30
  Speaker 1: if you would, and and and and one of them
• 1:01:33
  Speaker 1: is that in oh six it looks like if you're
• 1:01:39
  Speaker 1: merely willing to disregard the lessons of the past and
• 1:01:44
  Speaker 1: and plunge in, you can get rich. M And what
• 1:01:50
  Speaker 1: do people want more than anything else? You know? I
• 1:01:53
  Speaker 1: always imagine, uh, you know, those more movies about Las Vegas,
• 1:01:57
  Speaker 1: and and that you got the angel on one shoulder
• 1:02:00
  Speaker 1: saying don't do it, it's not the right thing, and
• 1:02:02
  Speaker 1: the devils sitting on the other shoulders saying, you know,
• 1:02:04
  Speaker 1: do it, it will be fun. Well, the devil always wins, right,
• 1:02:06
  Speaker 1: also wouldn't have a movie. Well in the investing business,
• 1:02:09
  Speaker 1: the angel sitting on one shoulder says, don't do it.
• 1:02:11
  Speaker 1: It's not prudent. You know, trees don't go to the sky.
• 1:02:14
  Speaker 1: It's too good to be true. The market risk is elevated.
• 1:02:18
  Speaker 1: But on the other side, the devil sitting there and
• 1:02:20
  Speaker 1: he says, do it, you'll get rich. And who is
• 1:02:23
  Speaker 1: that devil? Because the handmaiden to forgetting history very often
• 1:02:29
  Speaker 1: is that what have you done for me this quarter?
• 1:02:32
  Speaker 1: The investor class, So you and I are in the
• 1:02:34
  Speaker 1: business you a little longer and a lot more money
• 1:02:38
  Speaker 1: managing of managing other people's money. There is a very
• 1:02:42
  Speaker 1: very consistent thing that takes place every cycle where the
• 1:02:48
  Speaker 1: investor class says, this prudence thing has gone on long enough.
• 1:02:53
  Speaker 1: Everybody else is getting rich, why aren't you making me rich? Well,
• 1:02:56
  Speaker 1: people respect, people respect managers who exhibit proof. At the bottom,
• 1:03:01
  Speaker 1: they say, boy, I wish I wish I'd been with
• 1:03:03
  Speaker 1: that guy. He didn't lose his clients any money. But
• 1:03:06
  Speaker 1: at the top, when the market has doubled, nobody wants prudence.
• 1:03:10
  Speaker 1: They want the guy who full throw the most out
• 1:03:12
  Speaker 1: of that double This is what this is. This is
• 1:03:15
  Speaker 1: herd behavior, and uh, this is the This is the
• 1:03:20
  Speaker 1: ticket to losing money and the ticket to preserving capital
• 1:03:25
  Speaker 1: is something called contrarian behavior. Very very hard to do,
• 1:03:31
  Speaker 1: very hard to stick with, which is why you mentioned
• 1:03:35
  Speaker 1: by low so high, the crowd seems to find itself
• 1:03:38
  Speaker 1: constantly doing the opposite. When when that energy, when that
• 1:03:42
  Speaker 1: excitement and enthusiasm is there, they're looking to um, They're
• 1:03:46
  Speaker 1: looking to buy a top and and move forward. It's
• 1:03:50
  Speaker 1: very very easy. The crowd finds it very easy to
• 1:03:53
  Speaker 1: buy things that have been rising for a while and
• 1:03:57
  Speaker 1: very hard to buy things that have fallen. So in
• 1:04:01
  Speaker 1: the last few minutes we have I have a handful
• 1:04:03
  Speaker 1: of questions I'd like to ask everybody, and one or
• 1:04:05
  Speaker 1: two more quotes of yours. So so let me run
• 1:04:08
  Speaker 1: through these pretty quickly, and and we'll see if we
• 1:04:11
  Speaker 1: can get you out. I know we have a call
• 1:04:13
  Speaker 1: waiting for you shortly. Um. One of the things you
• 1:04:15
  Speaker 1: had mentioned previously that I always found interesting was clients
• 1:04:19
  Speaker 1: need a creed. Whether it's beta versus alpha, risk control,
• 1:04:23
  Speaker 1: return maximization. What's the significance of a creed? Why do
• 1:04:28
  Speaker 1: investors require one? Well, it's not really clients. I think
• 1:04:31
  Speaker 1: it's investors or money managers need a creed because you
• 1:04:34
  Speaker 1: have to have something to stand by, you know, uh,
• 1:04:40
  Speaker 1: A philosophy, philosophy, a religion. If you will, what do
• 1:04:46
  Speaker 1: you do, what do you don't do? What do you
• 1:04:48
  Speaker 1: believe in? What do you do not believe in? Uh?
• 1:04:50
  Speaker 1: You know, if you if you don't have these things,
• 1:04:53
  Speaker 1: and then what are your signposts of your of your activity,
• 1:04:59
  Speaker 1: of your behavior. What would you say, I buy things
• 1:05:02
  Speaker 1: that go up. That's not enough. You have to you
• 1:05:05
  Speaker 1: have to have a system for the kinds of things
• 1:05:09
  Speaker 1: you buy and how you figure out that they're a
• 1:05:12
  Speaker 1: buy and and how do you when you and when
• 1:05:15
  Speaker 1: you get off the trend and do you believe in
• 1:05:19
  Speaker 1: growth or value? I believe in forecasts or not forecast?
• 1:05:21
  Speaker 1: You believe in maximization or or risk control? Uh, there
• 1:05:27
  Speaker 1: are many many things that you should have to make
• 1:05:29
  Speaker 1: a decision about, um and and Uh, I believe you
• 1:05:34
  Speaker 1: can only you know. The people that I know who
• 1:05:36
  Speaker 1: are great investors all have They can state what it
• 1:05:40
  Speaker 1: is they do. MH. They have a philosophy, they have
• 1:05:44
  Speaker 1: freed and it could be summed up very very very simply. So,
• 1:05:47
  Speaker 1: So let's let's go through one other quote of yours
• 1:05:50
  Speaker 1: that I really like. Um and this this hearkens back
• 1:05:54
  Speaker 1: to your your discussion on probabilities. The future does not exist.
• 1:05:59
  Speaker 1: It is only a range of possibilities. We have to
• 1:06:02
  Speaker 1: understand that most outcomes will be determined by luck. Explain that, well,
• 1:06:09
  Speaker 1: the world and the economies and the markets do not
• 1:06:17
  Speaker 1: run according to you know, Newton's laws of physics. Uh.
• 1:06:24
  Speaker 1: You know. And if you hire an an electrician to
• 1:06:28
  Speaker 1: come in your house and he does it right, then
• 1:06:31
  Speaker 1: you know that if he puts in a light switch
• 1:06:32
  Speaker 1: over here and he throws that switch, the light will
• 1:06:35
  Speaker 1: go on over there every time. That's not the investment business.
• 1:06:39
  Speaker 1: There's no, there are no there are no relationships that
• 1:06:43
  Speaker 1: are that dependable. There's a lot of randomness. You know.
• 1:06:47
  Speaker 1: Sometimes the company announces good earnings and the stock goes up.
• 1:06:50
  Speaker 1: Sometimes they announced good earnings stock goes down. Uh, And
• 1:06:55
  Speaker 1: it just isn't that reliable, um and so um. You know.
• 1:07:01
  Speaker 1: We have to keep that in mind, and we have
• 1:07:04
  Speaker 1: to allow for other outcomes than the one we think
• 1:07:09
  Speaker 1: should happen. One of the things I try to point
• 1:07:11
  Speaker 1: out is that should does not mean will, and it
• 1:07:15
  Speaker 1: certainly does not mean will right away. Overpriced, if a
• 1:07:19
  Speaker 1: stock is over priced, that doesn't mean it's going down tomorrow.
• 1:07:22
  Speaker 1: You can stay over priced for a long time or
• 1:07:24
  Speaker 1: go higher, you know, Uh, cheap stocks get cheaper than
• 1:07:30
  Speaker 1: that's right. Lord Kane said the market could remain uh
• 1:07:34
  Speaker 1: in so irrational longer than you can remain solving. So
• 1:07:39
  Speaker 1: you can't. You can't bet your all your money that
• 1:07:44
  Speaker 1: the things that should happen will happen promptly. And that's
• 1:07:48
  Speaker 1: why I feel we have to think of the future
• 1:07:51
  Speaker 1: as a range of possible outcomes, and we had we
• 1:07:56
  Speaker 1: might bet on the one we think will happen, but
• 1:07:58
  Speaker 1: we should give allowance for some of the others, Now,
• 1:08:00
  Speaker 1: how much allowance which of the others? These are the
• 1:08:03
  Speaker 1: hard questions, Like I said before, how much do you
• 1:08:05
  Speaker 1: how much do you allow for the improbable disaster? You know,
• 1:08:09
  Speaker 1: in Fooled by randomness to lab talks about alternative histories,
• 1:08:13
  Speaker 1: the other things that probably reasonably could have happened but didn't.
• 1:08:17
  Speaker 1: We're thinking about and and and The point is that
• 1:08:21
  Speaker 1: the world is an uncertain place, just to say the least.
• 1:08:25
  Speaker 1: So speaking of uncertainty, you've been in the industry for
• 1:08:29
  Speaker 1: a few decades. Now, what have you noticed that has changed? Um,
• 1:08:35
  Speaker 1: what's the most important changes to the financial industry? And
• 1:08:39
  Speaker 1: is this a good thing or a beat? Well, the
• 1:08:40
  Speaker 1: biggest single change is that it has become much more
• 1:08:44
  Speaker 1: preoccupied with the short run. And that is very negative
• 1:08:49
  Speaker 1: for the people who participate because but it's very positive
• 1:08:54
  Speaker 1: for the people who for the people who like to
• 1:08:57
  Speaker 1: take advantage of other people's mistakes. The point is, many
• 1:09:01
  Speaker 1: people believe, you know, we used to buy stocks five
• 1:09:03
  Speaker 1: six years at the bank. Uh. Now people think that
• 1:09:07
  Speaker 1: if your owners for five or six months, it's a
• 1:09:09
  Speaker 1: long time hold. And and uh and so uh you know,
• 1:09:15
  Speaker 1: I I believe that you should figure out how to
• 1:09:18
  Speaker 1: make money in the long run and stick to that.
• 1:09:20
  Speaker 1: Now a lot of people say, no, there is no
• 1:09:22
  Speaker 1: long run. Is the long run is just a series
• 1:09:24
  Speaker 1: of short runs. But but but I don't I don't
• 1:09:28
  Speaker 1: go with that. And and you know, forty seven years ago,
• 1:09:34
  Speaker 1: when I started working at City Bank, at the end
• 1:09:37
  Speaker 1: of the year, it took a couple of days to
• 1:09:40
  Speaker 1: figure out how we did that year, to compute our
• 1:09:43
  Speaker 1: rate of return. Then you got to the point where
• 1:09:46
  Speaker 1: you got it the same day. Then you got to
• 1:09:50
  Speaker 1: the point where you could get it at the end
• 1:09:51
  Speaker 1: of every every month, then to the point where you
• 1:09:54
  Speaker 1: could get it at the end of every day. And
• 1:09:56
  Speaker 1: now every money manager worth is sold has the thing
• 1:09:59
  Speaker 1: on his Bloomberg screen which shows his return at that moment,
• 1:10:04
  Speaker 1: by take by take. And that's a negative. I think
• 1:10:07
  Speaker 1: it's a negative because that's not uh, that's not what
• 1:10:11
  Speaker 1: you should be thinking about. What did I make so
• 1:10:14
  Speaker 1: far today, what did I make this month? And that
• 1:10:18
  Speaker 1: kind of thing. You know. UH. My son Andrew uh
• 1:10:23
  Speaker 1: is UH is one of my most valued advisors, and
• 1:10:30
  Speaker 1: he gave me some great inspirations for my UH memo
• 1:10:36
  Speaker 1: on liquidity UH, and one of them was if you don't.
• 1:10:40
  Speaker 1: If you don't think you can hold a stock for
• 1:10:42
  Speaker 1: five years, don't even think about holding it for five minutes.
• 1:10:46
  Speaker 1: You know. Uh. The real way to build wealth in
• 1:10:52
  Speaker 1: the long run is to find a limited number of
• 1:10:56
  Speaker 1: things with a lot of potential and not too much risk,
• 1:10:59
  Speaker 1: and day with them for the long term. And and
• 1:11:03
  Speaker 1: I the thing he gave me that I thought was
• 1:11:05
  Speaker 1: the greatest, that made the greatest impression on me. He said,
• 1:11:09
  Speaker 1: when you look at a chart of a stock which
• 1:11:12
  Speaker 1: has gone up for twenty years, and you look at
• 1:11:15
  Speaker 1: that chart longingly, and you say, boy, I wish I'd
• 1:11:19
  Speaker 1: been on that stock. Think of all the days if
• 1:11:23
  Speaker 1: you bought it on the first day. Think of all
• 1:11:25
  Speaker 1: the days on which you would have had to talk
• 1:11:28
  Speaker 1: yourself out of selling. Everybody looks at those charts and say,
• 1:11:32
  Speaker 1: oh my god. You know, uh, Apple, it's up from
• 1:11:38
  Speaker 1: five bucks to five hundred bucks, and all you had
• 1:11:41
  Speaker 1: to do was buy it at five. And I once
• 1:11:44
  Speaker 1: had a friend who's talked to me about a piece
• 1:11:46
  Speaker 1: of property that could have brought X decades ago at
• 1:11:48
  Speaker 1: a very low price, you know, And I said, yes,
• 1:11:51
  Speaker 1: And as soon as it got to two X, you
• 1:11:52
  Speaker 1: would have sold it. You have to stay on for
• 1:11:55
  Speaker 1: the long run. And so I think, I think that
• 1:11:57
  Speaker 1: this short sightedness is the worst single to development and
• 1:12:00
  Speaker 1: per and and and ubiquitous. So before I get to
• 1:12:04
  Speaker 1: my last two questions, I would be remiss if I
• 1:12:06
  Speaker 1: did not mention the most important thing, which is your book,
• 1:12:11
  Speaker 1: which Warren Buffett, I want to give you this this.
• 1:12:15
  Speaker 1: I want to listeners to hear this quote because it
• 1:12:18
  Speaker 1: is just so um poignant and really um sums it
• 1:12:25
  Speaker 1: up perfectly. Buffett said, When I see memos from Howard
• 1:12:29
  Speaker 1: Marks in my mail, they're the first things I open
• 1:12:32
  Speaker 1: and read. I always learned something and that goes double
• 1:12:36
  Speaker 1: for his book. What was the motivation of of putting
• 1:12:40
  Speaker 1: the book together? And how gratifying is it to get
• 1:12:43
  Speaker 1: that sort of feedback from a Warren Buffett? Well? Uh,
• 1:12:46
  Speaker 1: number one, As I mentioned, I've been writing the memos
• 1:12:51
  Speaker 1: since I've been thinking one way the other since nineteen
• 1:12:57
  Speaker 1: seventy and uh, you know, I always thought that when
• 1:13:00
  Speaker 1: I retired, I would write a book and pull the
• 1:13:02
  Speaker 1: themes of the memos together. And and the truth is
• 1:13:05
  Speaker 1: I got a note from Well. I was approached by Columbia,
• 1:13:09
  Speaker 1: who was the publisher of the book Columbia University Press,
• 1:13:12
  Speaker 1: and they asked me to write a book. And then
• 1:13:13
  Speaker 1: I got an email from Warren and and he said, uh,
• 1:13:17
  Speaker 1: if you write a book, I'll give you a paragraph
• 1:13:20
  Speaker 1: for the jacket. So that was enough. Uh and so
• 1:13:24
  Speaker 1: and you know, Warren has been a great inspiration to me.
• 1:13:27
  Speaker 1: Um and uh and uh you know you just learned
• 1:13:32
  Speaker 1: so much through associating with him, and and uh, the
• 1:13:35
  Speaker 1: opportunity to to do something that he suggested was something
• 1:13:40
  Speaker 1: too good to pass up, to say the least. And
• 1:13:42
  Speaker 1: and now I know we we're tied on time. Let
• 1:13:45
  Speaker 1: me give you my last two questions. I asked all
• 1:13:47
  Speaker 1: of my guests. First, what sort of advice would you
• 1:13:50
  Speaker 1: give to somebody just graduating college and and starting out
• 1:13:54
  Speaker 1: in the financial business. Christopher Morley, the English writer, said,
• 1:14:02
  Speaker 1: there's only one success, to live your life your way.
• 1:14:05
  Speaker 1: So you know, I think that investing is very interesting,
• 1:14:09
  Speaker 1: uh discipline and obviously can be lucrative. Um, but it's
• 1:14:14
  Speaker 1: not for everybody, and you should figure out if it's
• 1:14:17
  Speaker 1: for you. The last thing you should do is go
• 1:14:20
  Speaker 1: into a career because everybody else is doing it, or
• 1:14:23
  Speaker 1: because it's hot, or because people say you can make
• 1:14:26
  Speaker 1: a lot of money. You know, you have to spend
• 1:14:28
  Speaker 1: your life in your career and you're not going to
• 1:14:31
  Speaker 1: get another one. Uh, So why wasted on something that's
• 1:14:34
  Speaker 1: not for you? Uh? You know it's been great for
• 1:14:38
  Speaker 1: me and it is simpatico with my with who I am,
• 1:14:42
  Speaker 1: but it's not for everybody, to say the very least.
• 1:14:45
  Speaker 1: And and then our final question, what is it you
• 1:14:48
  Speaker 1: know about investing today you wish you knew when you
• 1:14:52
  Speaker 1: began forty seven years ago? Um? And I love that
• 1:14:58
  Speaker 1: you stop and really contemplate these questions before jumping into them. Well,
• 1:15:04
  Speaker 1: I think that the whole aspect of number one contrarian
• 1:15:09
  Speaker 1: behavior and number two, uh, understanding what's going on around
• 1:15:17
  Speaker 1: you and basing your activities uh in response to that behavior.
• 1:15:25
  Speaker 1: I think these are the keys. You know, when you're
• 1:15:27
  Speaker 1: a kid, you come out, you start thinking that if
• 1:15:29
  Speaker 1: you can just find a stock whose earnings are going
• 1:15:31
  Speaker 1: to rise fast, that's the key to success. Uh. And
• 1:15:34
  Speaker 1: then as you do it longer, you learn that there's
• 1:15:37
  Speaker 1: so much more to it. So it's it's situational awareness
• 1:15:41
  Speaker 1: first and then knowing where in lens of your contrarian
• 1:15:45
  Speaker 1: um is that Howard, Thank you so much for being
• 1:15:48
  Speaker 1: so generous with your time and staying with us. Um
• 1:15:52
  Speaker 1: the full geez, almost ninety minutes. Uh. People want to
• 1:15:56
  Speaker 1: find your memos. It's at oak Tree Capital dot com.
• 1:15:59
  Speaker 1: You have the full history of news. I think they're
• 1:16:02
  Speaker 1: almost all there. Some were. The ones that were originally
• 1:16:05
  Speaker 1: written on papyrus are not available, but they're almost in
• 1:16:10
  Speaker 1: the book. And the book, you know, give us the
• 1:16:14
  Speaker 1: full time. It's called it's called the Well. The first
• 1:16:17
  Speaker 1: book was called The Most Important Thing Uncommon Sense for
• 1:16:20
  Speaker 1: the Thoughtful Investor. That came out in Columbia University Press.
• 1:16:23
  Speaker 1: And then a year or two later they brought out
• 1:16:25
  Speaker 1: something called The Most Important Thing Illuminated, which has an
• 1:16:29
  Speaker 1: additional chapter and commentary from myself and a number of
• 1:16:35
  Speaker 1: prominent investors, and it's annotated along throughout the throughout the book.
• 1:16:39
  Speaker 1: So you say something and other people explain what you mean. Howard,
• 1:16:44
  Speaker 1: thank you so much for this. You've been listening to
• 1:16:46
  Speaker 1: Masters in Business on Bloombug Radio. I want to thank
• 1:16:49
  Speaker 1: Mike bat Nick, my head of research, Matt my engineer,
• 1:16:52
  Speaker 1: and Charlie Vollmer Uh, my producer. If you've enjoyed this conversation.
• 1:16:57
  Speaker 1: Looked up an inch or down an inch and iTunes,
• 1:16:59
  Speaker 1: and you could see any of our prior forty nine
• 1:17:03
  Speaker 1: UM Masters in Business. You are our fiftieth and and
• 1:17:06
  Speaker 1: thank you so much for your time pleasure. You're listening
• 1:17:10
  Speaker 1: to Masters in Business with Barry Dholts on Bloomberg Radio